Sunday, January 19, 2014

A note for Sunday: a maturing expansion

  - by New Deal democrat

I thought I'd pen this note to clarify my 2014 forecast a little.

I wrote that I think this will be a year of decelerating growth.  I am still positive about the first three quarters of this year, and almost all of the indicators I use indicate that the present quarter, like the second half of last year, should be very positive.

And I do not foresee any recession, at least through the first three quarters of this year.  I'm withholding saying anything definitive about the 4th quarter until I see how corporate earnings play out in the current reporting season.

So I'm actually not pessimistic about this year at all.

Where I differ from most people who have written forecasts is that, while I expect the news to remain positive, I also see it being not quite so positive as the year progresses.

The most obvious difference I have with most is that I expect housing permits and starts to actually turn negative during the first half, in fact if the trend continues they'll be negative within 3 months.

If you want a simple phrase that captures my feeling well, it would be that we are in a maturing expansion.

All of the things that I would expect to turn up early have turned up.  With the exception of interest rates, none of the things I would expect to be negative a year or more out from a recession are negative.

Still, I feel a little like I did at the beginning of 2009.  We were in the epicenter of the recession, when I noticed that retail sales had stopped dropping like a rock.  I also saw that the pace of housing permits had been plummeting at a rate of -500,000 a year or more for several years, and was under the absolute level of 600,000 annualized.  Housing almost literally had to bottom in early or mid 2009, unless it was going all the way to zero!  So I started to watch for signs of a bottom or a turnaround.  And since I had been very bearish, even comparing the situation in 2007 to 1929, Doomers turned on me (and Bonddad) with a vengeance.

For a long time I've been trying to find sort of "anti-coincident" economic indicators.  These would be indicators that turn up or down after the lagging indicators but before the leading indicators of the next move.  There seem to be several, and they all appear to have peaked.

In general, what I am seeing are trends that I would expect to see in an expansion that is still moving along, but is getting a little long in the tooth.  For example, recently an increase in capital expenditures has been cited by bulls.  But that may well be a signal of a late point in the cycle.

This week or next week, I plan on writing about these trends, and more about my bearish housing call.  There is more supporting data, and I've pretty well figured out why 4 out of 21 times since WW2 that interest rates rose, housing didn't fall, so I'll explain that as well.

So I'm not actually pessimistic about 2014.  I am simply increasingly confident that we are in "a maturing expansion."  What is depressing is that wages are still stagnant, real disposable personal income has been improving at a pathetic rate, and employment is nowhere near recovering to its pre-recession level on a working-age population basis.